T-Mobile and Sprint Weigh Deal Terms

By Ryan Knutson

T-Mobile USInc. is making strong demands to be compensated by Sprint Corp. in the event regulators kill a merger of the two carriers, a main factor the companies are working through before agreeing to a deal, people familiar with the matter said.

Deutsche Telekom AG, which owns 67% of T-Mobile, wants a breakup fee of more than $1 billion and promises that T-Mobile’s brand and some of its management team would remain after a merger, some of the people said.

The demands are aimed at limiting the fallout in the event regulators shoot down a combination of Sprint, the third largest U.S. wireless carrier, and T-Mobile, the fourth largest, after signaling they would view it skeptically. There are other factors in the talks, including the level of opposition by the government and changes to rules governing companies’ spectrum holdings.

The carriers are working toward securing a deal in the near term, the people said. But given perceived regulatory opposition, the companies are weighing whether it is worth trying a deal now or waiting until after a government auction of wireless airwaves expected to take place in 2015 or under a different administration, people familiar with the matter said.

A key factor on how to proceed will come next week when the Federal Communications Commission plans to vote on a modification of the rules governing how much spectrum carriers can hold. The agency also is set to complete rules governing the spectrum auction, under which carriers would be able to buy licenses to airwaves sold by broadcasters.

Under rules proposed by the FCC, more of Sprint’s airwaves would be counted in the agency’s so-called spectrum screen than before, meaning the carrier could have a more difficult time in the future doing deals that expand its holdings.

The auction rules are expected to limit the amount of high quality airwaves AT&T Inc. and Verizon Communications Inc. are allowed to buy.

If the companies decide to proceed with a deal, retaining T-Mobile’s brand in some form and certain members of management would minimize disruption that might otherwise occur to the carrier’s business during a lengthy regulatory review. That is important for Deutsche Telekom, which was left with a shrunken T-Mobile when the Justice Department shot down its $39 billion deal to sell the carrier to AT&T three years ago.

The consolation was T-Mobile walked away with $3 billion in cash in addition to a swath of spectrum and valuable roaming agreements, helping it eventually develop a more competitive service.

If a deal moves forward in the near term, it would catch T-Mobile on the upswing. The carrier added more than 1.3 million monthly subscribers in the first three months of the year, the bulk of the industry’s total. Sprint, meanwhile, has suffered, losing 333,000 customers during the same period.

T-Mobile CEO John Legere is seen as a front-runner to lead the combined companies if a merger takes place.

“In the U.S. we’re getting signals from regulators as well as antitrust authorities that a merger isn’t perceived as expedient,” Mr. Höttges said. “Against that background, we have to see how we can best develop the business with the most value for our shareholders.”

The issue is a tricky one for Sprint, which hasn’t made a profit in the past seven years.

Masayoshi Son, Sprint’s chairman, wouldn’t do anything “reckless,” said a person familiar with the matter, and wants to avoid a situation where the deal gets blocked and T-Mobile walks away with billions of dollars from a breakup fee that it could then use to fight Sprint in the market.

There is broad agreement among both sides that a deal makes sense.

“To really create value in the market, at the highest speed, with a better network, with even more spectrum, a combination, for instance, with one of the players would make a lot of sense, to create a super-maverick against AT&T,” Mr. Höttges said during a call with analysts.

The sides also seem to agree that regulators would be more likely to approve a deal in a few years under a different administration, but worry that waiting could weaken both Sprint and T-Mobile’s competitive position against industry giants AT&T and Verizon Communications, which together collect the bulk of the industry’s profits and have about two-thirds of its customer base.

But some in the industry have argued that the commission needs to address the consolidation question now, rather than waiting until after the auction.

“You need to look at all of those things in context,” T-Mobile CEO Legere said in an interview last week.

Sprint Chief Executive Dan Hesse said last week it wouldn’t bother him if he doesn’t lead the combined company. In an interview with Bloomberg TV, Mr. Hesse said there are plenty of other things he is still interested in pursuing.